Money matters can be overwhelming, especially if you have not been taught or have any experience with financial education. That is where self-development books come in, they help you keep educating and improving yourself way past your schooling years. One such book is Total Money Makeover by Dave Ramsey, it is the best self-help book to help you manage your personal finances. The ideal first step, especially when you don’t know where to begin.
You may have heard of the importance of making a budget, saving money and investing for your future, but what you may not know is where to begin or what is most important when it comes to your personal finances. That is where the power of the total money makeover comes in. It provides a step-by-step approach for your money makeover but listing the order in which you can work towards achieving financial freedom. These work because they are truly ‘baby’ steps; simple ways towards a total money makeover. If you are struggling with this, this post summarizes Dave Ramsey’s 7 baby steps for a total money makeover.
1. Save $1000 for an emergency fund
An emergency fund is money that has been saved up but readily available for use in case of an emergency. This may include losing your job, falling sick for extended periods of time or any other unforeseen emergencies. It is recommended that you have 3-6 months of expenses saved up but that takes a long time to achieve, so the first baby step is save $1000 in case of an emergency.
2. Pay off all debt
Debt is a huge problem that most people face. It makes it difficult to move forward with your personal finances and money makeover if you are working with a negative balance. So work on decreasing your debt to get closer to your goals of financial freedom. This includes all debt excluding your mortgage or home loan.
3. Pay into an emergency fund 3-6 months of living expenses
Once you have completed the first 2 steps, it becomes easier to focus on building up your emergency fund to 3-6 months worth of living expenses. You would have paid off your debt which frees up more money that you can use to achieve this goal.
4. Invest 15% of household income into a tax advantage account
You may know that the sooner you start investing, with however little money you may have, the better because you will have time and compound interest on your side. This step in the total money makeover plan gives an indication of the amount of money you should aim to invest.
5. Save for kids College Fund
The total student loan debt as of 2020 is $1.6 trillion with 44.7 million US borrowers and an average of $33 000 student loan debt according to Forbes. These statistics are shocking and indicate the financial crisis that most people are in. It is therefore advised that you start saving for your child’s education as early as possible, regardless of the other expenses that may seem like a priority at the time. This will help stop this cycle of student loan debt for future generations.
6. Pay off your home mortgage early
Paying off the mortgage loan of your primary residence early will provide peace of mind for you. Knowing that in case something happens, at least you and your family will have a place to stay. This may take time, but there are strategies, such as using HELOC that may help speed up the process.
7. Build wealth and give back
Once you have done these essential steps in the total money makeover, you can build wealth and start to give back. Leave an inheritance for future generations and philanthropy is important because it provides opportunities to others and it will make you feel good as well.
Take Home Points
The baby steps for the total money makeover provide a roadmap that you may follow as you work towards achieving financial freedom. These work because they are simple to do.
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